Banks have grown too large and complex and are struggling to deliver added value to final investment relationships in a world of high fees, frequent financial crises, damage of reputation and zero interest rates.
Banking regulation has stepped up the cost of capital. However, market regulation was also strengthened to foster higher customer protection in the aftermath of the global financial crisis, and enforce full transparency about costs and risks negotiated with taxable investors. This has been a perfect storm for retail and private banks: compliance costs sky-rocket while FinTech competition erodes their profitability.
Why, then, does change take so long to happen? Because today’s main challenge is not related to technology only (e.g. streamlining back office operations), but to a change in existing business models and incentives. FinTech innovation in wealth management is truly about a revolution in how money is made by both clients and intermediaries, and profits are shared within the offer-side.
Changing the bank is an expensive process. Previous approaches to this have operated according to two principles aimed at enhancing operational efficiency: functional excellence and the uniqueness of resources. Yet customers could not truly differentiate between these improvements. Uniqueness of resources has been identified as a competitive edge.
Finally, with the rise of robo-advisors the focus has started to shift towards the customer. This has moved the emphasis from internal efficiency toward front-end design and building of customer-focus processes. But a nice digital design is not enough. Sustaining growth with FinTech innovation is about improving how customers interact with investments, with their financial advisors. Therefore, the current strategic shift in digital wealth management and robo-advisors 2.0 is grounded in the search for advanced client orientated approaches to rebuild trust in the investment relationship.
Banks are now asked by regulators, FinTechs and generational shifts to transform from distribution channels of products into distribution channels of advice which are not remunerated by opaque agreements on retrocession but fee-only propositions based on delivered investment added value. That is not easy, and it explains why technology changes need to go hand in hand with a modification of investment proposition (goal based investing) and a change in investment behaviour. Technology can add value, as cognitive gamification offers a chance to create investment experiences that help advisors to learn more about respective customers, and help final investors to rewire their brains towards a more efficient and less erratic investment decision-making.
IBM Thought Leader,
Wealth Management FinTech Analytics